For investors, the starting point when considering real estate funds is education and awareness. The many types of real estate funds include publicly traded real estate investment trusts (REITs) and index funds, which are liquid but generally offer lower income and are highly correlated with equities. There are also non-traded and interval funds, which are less liquid but often provide higher yields and greater tax deferral benefits. Additionally, private funds involve specialized strategies, typically designed for accredited investors, according to Rich Arzaga, founder of Monument, Colorado-based The Real Estate Whisperer Financial Planning.
“A client’s income needs, tax situation, and liquidity preferences often drive which type makes the most sense,” Arzaga explained.
### Diversification Is Key
Diversification is also a key concern, said Merriah Harkins, chief sales officer at Phoenix-based real estate investment firm Lukrom. She generally promotes diversification above everything else.
Private credit, REITs, development funds, and other fund structures that provide exposure across real estate asset categories — from multifamily and single-family homes to retail and commercial properties, spanning both public and private markets and varying risk levels — should be considered, she said.
“When a client says they can earn 15% here and 8% there, they must understand the level of risk they are taking for the possibility of that higher return,” Harkins noted. “It is critical to be informed about the fund’s structure and the risk mitigation factors.”
### Risk and Reward Vary
Real estate funds, like other investments, can vary significantly in terms of risk and reward.
“Conservative funds can help to balance out the risky funds in the portfolio,” Harkins said. “This ensures that a diversified portfolio will provide more stable returns and remain resilient when other investments are experiencing significant losses.”
### What Makes a Real Estate Fund Desirable?
The characteristics of a good real estate fund depend on client objectives, said Arzaga. If the goal is diversification, publicly traded REITs are accessible but can be as volatile as the S&P 500. For lower correlation, REITs focused on different property types — for example, warehouse versus office — can help balance exposure.
“A solid track record, experienced management, and prudent leverage are always desirable traits,” he added.
Arzaga defines a “bad” real estate fund as one carrying higher, avoidable risk. Examples include newer funds with limited track records, inexperienced managers, or excessively leveraged portfolios.
### Due Diligence Is Critical
It’s critical for advisors to perform due diligence, emphasized Harkins. Single-asset projects or funds can be riskier than diversified funds that span multiple real estate types. Funds focused on high-growth metro markets often offer more resilience during challenging market cycles.
“An investor’s due diligence should include the fund sponsor’s track record across multiple economic cycles, the fee structure, available tax advantages, if any, a history of stable returns, and whether the company offering the fund has a significant investment in the fund to determine the level of investor alignment,” she advised.
### Looking Ahead: Market Trends and Considerations
The cost of credit and real estate assets in many sectors remains very high due to limited inventory, but the trend toward lower interest rates is welcome, said Harkins. This may result in increased inventory, which could also put downward pressure on property values.
If a fund is raising substantial capital, it should prioritize sound economic decisions, particularly given the risk of investing in properties vulnerable to market shifts.
“The investments need to make sense, and to meet the stated expected return of a fund, you must determine whether the real estate in the fund will be improved enough to overcome those factors,” Harkins commented.
“Understanding how much debt the fund plans to assume and the terms, whether fixed or variable, is also an important factor to consider, given interest rate fluctuations and uncertainty.”
### A Long-Term Perspective
Overall, Arzaga views real estate as a long-term investment.
“Because property types cycle over time, trying to ‘time’ which sector will outperform is usually a moot point,” he said. “For investors with a long horizon, the current market can be just as productive as others provided the fund structure aligns with the client’s needs.”
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https://www.financial-planning.com/list/10-best-and-worst-real-estate-funds-of-the-past-three-years
